Mar 4, 2008

How Are Rental Markets Doing?

Many of our clients have asked about rental markets, and how this downturn has impacted that business.

Here's an article from the National Association of Realtors that partially answers that question. It's addressing the macro level question. If you want data at the micro level in our areas, give me a call.

Note my extreme happiness with the Austin numbers!

Many thanks to NAR for this article,

- Jim

Rental Squeeze Play By Lawrence Yun, NAR Chief Economist

Home sales activity has fallen to levels similar to those before the housing boom years. Many regions are experiencing the lowest sales activity in nearly 10 years — looking all the way back to 1998, the year when no one would say homeownership and housing was in a boom. The flip side of lower levels of ownership, which has fallen to 67.8 percent at the end of 2007 from as high as 69.2 percent in 2004, is that there are more people renting.

Just in the past year, the number of rental households grew by 1.5 million while homeowner households fell by roughly 600,000, according to the U.S. Census Bureau. With the U.S. population growing at 3 million per year, there is a natural increase in demand for housing. People need to live somewhere. ut more renters have pushed up apartment rents strongly — particularly in localities where home sales took a notable dive yet job gains continue at a solid pace. Here are some samples of rent rises in markets with strong jobs yet experiencing recent significant declines in home sales (partly due to lower housing affordability from a strong run-up in home values of the past 3 years):

Austin — rents are up 5.6% over the past year
Honolulu — up 5.9%
Portland, Ore. — up 7.0%
San Francisco — up 8.8%
Salt Lake City — up 8.9%
Seattle — up 9.6%
San Jose — up 10.3%

The rent data is from Torto-Wheaton Research. One REALTOR® in Salt Lake City told me that he has never experienced a better market condition because he is covered on both sides. With many properties, a strong rise in home values have resulted in substantial capital gains while his monthly income flows are rising better than 10 percent for his properties — something he never experienced in the past.

Of course, not all markets are equal. Rents are falling in regions where jobs are being lost like in Detroit and sluggish in areas where there is a high inventory of vacant homes such as in Orlando. Nationally, according the Bureau of Labor Statistics data on consumer inflation on rents showed a rise of 4 percent.

In 2008, I suspect that markets with continuing strong jobs as in Oklahoma City, Washington D.C. and New York could get a jolt in rising rents.

America is fortunate to have dynamism in population growth. More people mean more demand for housing — either rental or for ownership. In eastern Germany, many people migrated to the western side after the fall of the Berlin Wall thereby leaving behind hordes of vacant housing units. Both apartment rents and home values fell as a result. Similar trends are observed in current rural Japan where overall country population has stalled yet people are moving in to the metro areas of Osaka and Tokyo.

Within five years, I suspect Florida markets, along with Arizona and Las Vegas, to be the hotbed of the housing market in terms of both home price and high apartment rents, because demographics of baby boomer retirement nearly assures very high demand for warm climate regions.

Again, America is fortunate to have a solid 3 million population addition per year. That normally would translate into about 1.5 million household formations. In 2007, it was much lower than that as people found additional roommates or moved back in with their parents. That naturally also means that recent slowdown in household formation and the accompanying lower than normal demand for housing units just cannot be sustained when the country is continuing to add 3 million new people. With homebuilders having cut back production to 1 million units per year, any return to normalcy in household formation could result in either an accelerating rents, rising home sales, or both.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.

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